1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 0-19424
-------------------------------
EZCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2540145
-------------- -------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
-------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(512) 314-3400
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NA
--
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of June 30, 2001, 10,937,841 shares of the registrant's Class A Non-voting
Common Stock, par value $.01 per share and 1,190,057 shares of the registrant's
Class B Voting Common Stock, par value $.01 per share were outstanding.
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2
EZCORP, INC.
INDEX TO FORM 10-Q
<Table>
<Caption>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001, June 30, 2000 and September
30, 2000 ................................................................................ 1
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended June 30, 2001 and 2000 ............................................................ 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2001
and 2000 ................................................................................ 3
Notes to Condensed Consolidated Financial Statements .................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................. 8
PART II. OTHER INFORMATION ............................................................................... 14
SIGNATURE ................................................................................................. 15
</Table>
3
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
<Table>
<Caption>
June 30, June 30, September 30,
2001 2000 2000
------------ ------------ ------------
(In thousands)
(Unaudited) (Note A)
Assets:
Current assets:
Cash and cash equivalents $ 2,626 $ 1,229 $ 3,126
Pawn loans 47,199 45,770 46,916
Short-term loans and finance charges receivable, net 1,039 38 40
Pawn service charges receivable 7,838 8,575 8,629
Inventory, net 33,711 39,976 35,660
Deferred tax asset 7,081 8,023 9,636
Federal income tax receivable -- 1,949 5,045
Prepaid expenses and other current assets 2,622 2,868 1,525
------------ ------------ ------------
Total current assets 102,116 108,428 110,577
Investment in unconsolidated affiliate 13,716 14,488 14,021
Property and equipment, net 52,384 65,265 61,130
Other assets, net 18,436 20,999 18,065
------------ ------------ ------------
Total assets $ 186,652 $ 209,180 $ 203,793
============ ============ ============
Liabilities and stockholders' equity:
Current liabilities:
Current maturities of long-term debt $ 67,671 $ 76,012 $ 22,087
Accounts payable and other accrued expenses 9,346 9,596 12,011
Restructuring reserve 481 -- 1,649
Customer layaway deposits 2,045 2,245 2,332
------------ ------------ ------------
Total current liabilities 79,543 87,853 38,079
Long-term debt, less current maturities 91 103 59,025
Deferred tax liability 990 1,696 3,639
Other long-term liabilities 2,897 387 379
------------ ------------ ------------
Total long-term liabilities 3,978 2,186 63,043
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.01 per share;
Authorized 5,000,000 shares; none issued and -- -- --
outstanding
Class A Non-voting Common Stock, par value $.01 per
share;
Authorized 40,000,000 shares; 10,946,874 issued and
10,937,841 outstanding at June 30, 2001 and September
30, 2000; 10,831,043 issued and 10,822,010
outstanding at June 30, 2000 109 108 109
Class B Voting Common Stock, convertible, par value $.01
per share;
Authorized 1,198,990 shares; 1,190,057 issued and
outstanding at June 30, 2001, September 30, 2000 and
June 30, 2000 12 12 12
Additional paid-in capital 114,663 114,501 114,569
Retained earnings (deficit) (10,515) 4,905 (11,159)
------------ ------------ ------------
104,269 119,526 103,531
Treasury stock (9,033 shares) (35) (35) (35)
Receivable from stockholder (729) (729) (729)
Accumulated other comprehensive income (374) 379 (96)
------------ ------------ ------------
Total stockholders' equity 103,131 119,141 102,671
------------ ------------ ------------
Total liabilities and stockholders' equity $ 186,652 $ 209,180 $ 203,793
============ ============ ============
</Table>
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
4
Condensed Consolidated Statements of Operations (Unaudited)
<Table>
<Caption>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(In thousands, except per share amounts)
Revenues:
Sales $ 29,628 $ 28,448 $ 97,554 $ 105,973
Pawn service charges 12,704 13,511 40,399 43,086
Short-term loan finance charges 612 44 732 122
Other 156 235 475 694
--------- --------- --------- ---------
43,100 42,238 139,160 149,875
Cost of goods sold 18,427 16,085 57,960 63,455
--------- --------- --------- ---------
Net revenues 24,673 26,153 81,200 86,420
Operating expenses:
Operations 18,345 20,669 56,061 64,446
Administrative 3,010 4,817 10,523 14,314
Depreciation and amortization 2,870 2,492 8,118 7,575
Restructuring expense (reversal) (696) 0 (696) 0
--------- --------- --------- ---------
23,529 27,978 74,006 86,335
--------- --------- --------- ---------
Operating income (loss) 1,144 (1,825) 7,194 85
Interest expense, net 2,028 1,196 6,548 3,728
Equity in net income of unconsolidated affiliate (71) (69) (208) (216)
(Gain)/loss on sale of assets 166 208 162 (242)
--------- --------- --------- ---------
Income (loss) before income taxes (979) (3,160) 692 (3,185)
Income tax expense (benefit) (537) (1,010) 48 (1,019)
--------- --------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle $ (442) $ (2,150) $ 644 $ (2,166)
Cumulative effect on prior years (to September 30, 1999) of
change in method of revenue recognition, net of tax -- -- -- (14,344)
--------- --------- --------- ---------
Net income (loss) $ (442) $ (2,150) $ 644 $ (16,510)
========= ========= ========= =========
Amounts per common share (basic and fully diluted):
Income (loss) before cumulative effect of a change in
accounting principle $ (0.04) $ (0.18) $ 0.05 $ (0.18)
Cumulative effect on prior years (to September 30,
1999) of change in method of revenue recognition, net of tax $ -- $ -- $ -- $ (1.19)
--------- --------- --------- ---------
Net income (loss) $ (0.04) $ (0.18) $ 0.05 $ (1.37)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 12,113 12,012 12,094 12,012
========= ========= ========= =========
Fully diluted 12,113 12,012 12,094 12,012
========= ========= ========= =========
Cash dividends per common share $ -- $ -- $ -- $ 0.025
</Table>
See Notes to Condensed Consolidated Financial Statements (unaudited).
2
5
Condensed Consolidated Statements of Cash Flows (Unaudited)
<Table>
<Caption>
Nine Months Ended
June 30,
----------------------------
2001 2000
------------ ------------
(In thousands)
Operating Activities:
Net income (loss) $ 644 $ (16,510)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of a change in accounting principle -- 14,344
Depreciation and amortization 8,118 7,575
Deferred income taxes (94) 1,489
Restructuring expenses (696) --
Net gain (loss) on sale or disposal of assets 162 (242)
Income from investment in unconsolidated affiliate (208) (216)
Changes in operating assets and liabilities:
Service charges receivable 791 927
Short term loan finance charges receivable (169) --
Inventory 1,949 3,575
Notes receivable from related parties 40 (220)
Prepaid expenses, other current assets, and other assets, net (1,873) 1,141
Accounts payable and accrued expenses (2,288) (1,307)
Restructuring reserve (1,623) --
Customer layaway deposits (287) (176)
Other long-term liabilities (18) (121)
Federal income taxes receivable 5,045 (428)
------------ ------------
Net cash provided by operating activities 9,493 9,831
Investing Activities:
Pawn loans forfeited and transferred to inventory 51,249 53,688
Pawn loans made (137,784) (138,316)
Pawn loans repaid 86,252 92,798
------------ ------------
Net decrease (increase) in loans (283) 8,170
Short-term loans (830) (38)
Additions to property, plant, and equipment (3,952) (14,956)
Additions to intangible assets -- (621)
Investment in unconsolidated affiliate 236 (841)
Proceeds from sale of assets 8,186 4,093
------------ ------------
Net cash provided by (used in) investing activities 3,357 (4,193)
Financing Activities:
Proceeds from bank borrowings 30,650 31,500
Payments on borrowings (44,000) (38,508)
Payment of dividends -- (300)
------------ ------------
Net cash used in financing activities (13,350) (7,308)
------------ ------------
Change in cash and cash equivalents (500) (1,670)
Cash and cash equivalents at beginning of period 3,126 2,899
------------ ------------
Cash and cash equivalents at end of period $ 2,626 $ 1,229
============ ============
Non-cash Investing and Financing Activities:
Foreign currency translation adjustment $ 278 $ 235
Deferred gain on sale-leaseback $ 2,763 $ --
Issuance of stock options $ -- $ 31
Issuance of stock to 401k plan $ 89 $ --
</Table>
See Notes to Condensed Consolidated Financial Statements (unaudited).
3
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. The accompanying financial statements should be read with the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2000.
The Company's business is subject to seasonal variations, and operating results
for the nine-month period ended June 30, 2001 are not necessarily indicative of
the results of operations for the full fiscal year.
The balance sheet at September 30, 2000 has been derived from the audited
financial statements at that date but do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
NOTE B: CHANGE IN ACCOUNTING PRINCIPLE
During the second quarter of fiscal 2000, the Company changed its method of
revenue recognition on pawn loans by reducing the accrual of pawn service charge
revenue to the estimated amount which will be realized through loan collection
and recording forfeited collateral at the lower of cost (the principal amount of
the loan) or market. Previously, pawn service charges were accrued on all loans,
and the carrying value of the forfeited collateral was the lower of cost
(principal amount of loan plus accrued pawn service charges) or market.
The Company believes the new method of revenue recognition is preferable in that
it better aligns reported net revenues and earnings with current economic trends
in its business and the management of the Company. In addition, the Company
believes the new method improves comparability of its operating results and
financial position with similar companies.
The effect of the accounting change on the three months ended June 30, 2000 was
to increase net loss by $0.6 million ($0.05 per share). The effect of the change
on the nine months ended June 30, 2000, excluding the cumulative effect of $14.3
million, was to decrease the net loss by $3.5 million ($0.29 per share).
NOTE C: RESTRUCTURING CHARGE
As more fully described in Note C to the Company's audited financial statements
for the year ended September 30, 2000, the Company reviewed its store portfolio
to determine whether closing certain stores would improve the Company's
profitability and to determine whether certain stores were strategically viable.
As a result of this review and the continuing evaluation of such assets for
impairment, the Company decided to close 54 stores and recorded a pretax charge
of $11.8 million ($7.8 million net of tax) during the fourth quarter of Fiscal
2000. Of the 54 stores, 47 were closed as of June 30, 2001, resulting in 148
employee terminations.
In June 2001, the Company re-evaluated the seven remaining stores and decided to
continue their operation, based on improved performance and future outlook for
these stores. Accordingly, the Company reversed the $1.3 million restructure
accrual related to these seven stores. The Company recorded an additional $0.3
million restructure expense for the 47 stores previously closed, primarily to
account for lease obligations costing more than originally estimated, resulting
in a net credit to restructuring expense of $1.0 million in the period ended
June 30, 2001.
4
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
Of the $1.0 million net credit, $0.7 million is for the anticipated
administrative costs and loss from disposing of the seven stores' fixed and
intangible assets and is recorded as a credit to restructuring expense, where
the charge was recorded in September 2000. The remaining $0.3 million was
originally charged to cost of goods sold to write these stores' inventory down
to liquidation value, and was credited to cost of goods sold in June 2001, as
the Company no longer expects to sell this inventory at liquidation prices.
The results of operations from the 47 closed stores were as follows (in
thousands):
<Table>
<Caption>
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Total revenues $ -- $ 3,453 $ 939 $ 12,588
Operating loss $ (4) $ (796) $ (462) $ (2,029)
</Table>
At June 30, 2001, the Company had a remaining restructuring reserve of $0.5
million. It is anticipated that all remaining material cash outlays required for
these store closings and related restructuring costs will be made during fiscal
2001. The following is a summary of the types and amounts recognized as accrued
expenses together with adjustments and cash payments made against such accruals
(in thousands):
<Table>
<Caption>
Write-off of
Lease Long-Lived Administrative Net Book Proceeds
Settlement Workforce and Intangible and Other Value of from Sale Total
Costs Severance Assets Exit Costs Assets Sold of Assets Reserve
------------ ------------ -------------- ------------ ------------ ------------ ------------
Reserve balance
at September 30,
2000 $ 582 $ 908 $ -- $ 456 $ 430 $ (727) $ 1,649
============ ============ ============ ============ ============ ============ ============
Reserve utilized (617) (569) -- (391) (46) -- (1,623)
Adjustments 167 (18) (1,151) (22) (399) 727 (696)
Reverse the
utilization of
the long-lived
assets reserve -- -- 1,151 -- -- -- 1,151
------------ ------------ ------------ ------------ ------------ ------------ ------------
Reserve balance
at June 30, 2001 $ 132 $ 321 $ -- $ 43 $ (15) $ -- $ 481
============ ============ ============ ============ ============ ============ ============
</Table>
In conjunction with the restructuring in fiscal 2000, the Company recorded an
additional $1.2 million inventory reserve for anticipated losses on sales at
stores to be closed. This amount was charged to cost of goods sold in fiscal
2000 and is excluded from the table above. Of this inventory reserve, $0.1
million was utilized by September 30, 2000, $0.6 million was utilized in the
first quarter of fiscal 2001, $0.2 million was utilized in the second quarter of
fiscal 2001, and $0.3 million was reversed in the third quarter of fiscal 2001,
as described above, leaving no balance at June 30, 2001.
5
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
NOTE D: ACCOUNTING PRINCIPLES AND PRACTICES
The provision for federal income taxes has been calculated based on the
Company's estimate of its effective tax rate for the full fiscal year.
The Company provides inventory reserves for shrinkage and cost in excess of
market value. The Company estimates these reserves using analysis of sales
trends, inventory aging, sales margins and shrinkage on inventory. At June 30,
2001, June 30, 2000, and September 30, 2000, inventory reserves were $1.0
million, $1.2 million, and $2.2 million, respectively.
Property and equipment is shown net of accumulated depreciation of $47.6
million, $65.3 million and $47.2 million at June 30, 2001, June 30, 2000, and
September 30, 2000, respectively.
Certain prior year balances have been reclassified to conform with the fiscal
2001 presentation.
NOTE E: EARNINGS PER SHARE
For purposes of calculating earnings (loss) per share, the numerator is net
income (loss) for the applicable period. Dilutive warrants and employee stock
options for all periods presented are minimal and thus have no dilutive effect
on earnings per share.
The following table presents the weighted average shares subject to options
outstanding during the periods indicated. Anti-dilutive options have been
excluded from the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be anti-dilutive. Options outstanding at June
30, 2001 were excluded from the computation of loss per share because the
Company incurred a loss in the three-month period.
<Table>
<Caption>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Total options outstanding
Weighted average shares subject to options 1,352,594 1,600,854 1,377,412 1,598,515
Average exercise price per share $ 8.21 $ 11.06 $ 8.18 $ 11.15
Anti-dilutive options outstanding
Weighted average shares subject to options 949,102 1,600,854 1,377,412 1,598,515
Average exercise price per share $ 10.85 $ 11.06 $ 8.18 $ 11.15
</Table>
NOTE F: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), representing 29.47% of A&B's outstanding shares. The Company accounts
for its investment in A&B using the equity method. Since A&B's fiscal year ends
three months prior to the Company's fiscal year, the income reported by the
Company for its investment in A&B is on a three month lag. The income reported
for the Company's nine-month period ended June 30, 2001 represents its
percentage interest in the results of A&B's operations from July through March
2001, reduced by the amortization of the excess purchase price over fair market
value. A&B's shares are listed on the Alternative Investment Market of the
London Stock Exchange and at June 30, 2001, the market value of this investment
was approximately $9.4 million, based on the closing market price on that date.
6
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
NOTE G: CONTINGENCIES
From time to time, the Company is involved in litigation relating to claims
arising from its normal business operations. Currently, the Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts. While the ultimate outcome of these lawsuits cannot be
ascertained, after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect on the
Company's financial condition or results of operations. However, there can be no
assurance as to the ultimate outcome of these matters.
NOTE H: COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a component of
total shareholders' equity. Comprehensive income (loss) for the three and nine
months ended June 30, 2001 was approximately $(0.7) million and $0.4 million,
and the comprehensive loss for the three and nine months ended June 30, 2000 was
approximately $(2.2) million and ($16.3) million, respectively. The difference
between comprehensive income and net income results primarily from the effect of
foreign currency translation adjustments in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation." The
accumulated balance of foreign currency activity excluded from net income is
presented in the Condensed Consolidated Balance Sheets as "Accumulated other
comprehensive income."
NOTE I: LONG-TERM DEBT
The Company's $85 million credit agreement, maturing December 3, 2001, provides
for a $45 million revolving credit facility and two term loan facilities
totaling $40 million which are secured by substantially all of the Company's
assets. Remaining availability under the revolving credit facility was $1.2
million at June 30, 2001, based on pawn loan and inventory balances. The term
facilities require principal payments of $22.1 million during fiscal 2001, $15.1
million of which has been paid. The remaining principal payments will be made
from operating cash flow and the sale of assets, primarily sale-leaseback
transactions of various owned properties. Interest on the facility is at the
agent bank's prime rate plus 250 to 350 basis points. The Company pays a
commitment fee of 25 basis points on the unused amount of the revolving
facility.
The Company's credit agreement requires, among other provisions, that the
Company meet certain financial covenants. Specifically, the Company must operate
within specified levels of consolidated net worth, leverage ratio, capital
expenditures, inventory turnover, fixed charge coverage ratio, and EBITDA
(earnings before interest, taxes, depreciation and amortization). The Company
has complied with these covenants throughout Fiscal 2001. Based upon
management's fiscal 2001 operating plan, including the sale-leaseback of certain
assets and the availability under the revolving credit facility, the Company
believes that there is adequate liquidity to fund the Company's working capital
requirements, planned capital expenditures, and make the required principal
payments under the credit agreement. However, material shortfalls or variances
from anticipated performance or delays in the sale of certain of its assets
could require the Company to seek a further amendment to its credit agreement or
alternate sources of financing, or to limit capital expenditures to an amount
less than currently anticipated or permitted under the credit agreement.
7
10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report.
Third Quarter Ended June 30, 2001 vs. Third Quarter Ended June 30, 2000
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three months ended June 30, 2001 and 2000.
<Table>
<Caption>
Three Months Ended % or
June 30,(a) Point
2001 2000 Change(b)
------------ ------------ ------------
Net revenues:
Sales $ 29,628 $ 28,448 4.2%
Pawn service charges 12,704 13,511 (6.0)%
Short-term loan finance charges 612 44 1,290.9%
Other 235 (33.6)%
------------ ------------
156
Total revenues 43,100 42,238 2.0%
Cost of goods sold 18,427 16,085 14.6%
------------ ------------
Net revenues $ 24,673 $ 26,153 (5.7)%
============ ============
Other data:
Gross profit as a percent of sales 37.8% 43.5% (5.7) pts.
Average annual inventory turnover 2.2x 1.6x 0.6x
Inventory per store at end of the period $ 117 $ 119 (1.7)%
Pawn loan balance per store at end of period $ 163 $ 136 19.9%
Average annualized yield on loan portfolio 116% 128% (12.0) pts.
Expenses as a percent of total revenues:
Operating 42.6% 48.9% (6.3) pts.
Administrative 7.0% 11.4% (4.4) pts.
Depreciation and amortization 6.7% 5.9% 0.8 pt.
Interest, net 4.7% 2.8% 1.9 pts.
Locations in operation:
Beginning of period 289 336
Acquired -- --
Established -- --
Sold, combined or closed
------------ ------------
End of period 289 336
============ ============
Average locations in operation during the period(c) 289 336
</Table>
(a) In thousands, except percentages, inventory turnover and store count.
(b) In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
(c) Average locations in operation during the period are calculated based on
the average of the locations operating at the beginning and end of such
period.
8
11
Nine Months Ended June 30, 2001 vs. Nine Months Ended June 30, 2000
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the nine months ended June 30, 2001 and 2000.
<Table>
<Caption>
Nine Months Ended % or
June 30,(a) Point
2001 2000 Change(b)
--------- --------- ---------
Net revenues:
Sales $ 97,554 $ 105,973 (7.9)%
Pawn service charges 40,399 43,086 (6.2)%
Short-term loan finance charges 732 122 500.0%
Other 475 694 (31.6)%
--------- ---------
Total revenues 139,160 149,875 (7.2)%
Cost of goods sold 57,960 63,455 (8.7)%
--------- ---------
Net revenues $ 81,200 $ 86,420 (6.0)%
========= =========
Other data:
Gross profit as a percent of sales 40.6% 40.1% 0.5 pt.
Average annual inventory turnover 2.1x 2.0x 0.1x
Inventory per store at end of the period $ 117 $ 119 (1.7)%
Pawn loan balance per store at end of period $ 163 $ 136 19.9%
Average annualized yield on loan portfolio 121% 126% (5.0) pts.
Expenses as a percent of total revenues:
Operating 40.3% 43.0% (2.7) pts.
Administrative 7.6% 9.6% (2.0) pts.
Depreciation and amortization 5.8% 5.1% 0.7 pt.
Interest, net 4.7% 2.5% 2.2 pts.
Locations in operation:
Beginning of period 313 331
Acquired -- --
Established -- 5
Sold, combined or closed
24 --
--------- ---------
End of period 289 336
========= =========
Average locations in operation during the period(c) 294.1 334.7
</Table>
(a) In thousands, except percentages, inventory turnover and store count.
(b) In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
(c) Average locations in operation during the period are calculated based on
the average of the locations operating at the beginning and end of such
period.
9
12
RESULTS OF OPERATIONS
The following discussion compares results for the three and nine-month periods
ended June 30, 2001 ("Fiscal 2001 Periods") to the three and nine-month periods
ended June 30, 2000 ("Fiscal 2000 Periods"). The discussion should be read in
conjunction with the accompanying financial statements and related notes.
During the Company's fourth fiscal 2000 quarter, the Company made the decision
to close up to 54 stores. As of June 30, 2001, 47 of the 54 stores have closed.
For the three-month Fiscal 2000 Period, these 47 stores had net revenues of $2.1
million, store operating expenses of $2.6 million, and depreciation and
amortization of $0.3 million, for an operating loss of $0.8 million. For the
nine-month Fiscal 2000 Period, these 47 stores had net revenues of $7.0 million,
store operating expenses of $8.2 million, and depreciation and amortization of
$0.8 million, for an operating loss of $2.0 million.
In June 2001, the Company re-evaluated the seven remaining stores and decided to
continue their operation, based on improved performance and future outlook for
these stores. Accordingly, the Company reversed the $1.3 million restructure
accrual related to these seven stores. The Company recorded an additional $0.3
million restructure expense for the 47 stores previously closed, primarily to
account for lease obligations costing more than originally estimated, resulting
in a net credit to restructuring expense of $1.0 million in the period ended
June 30, 2001.
Of the $1.0 million net credit, $0.7 million is for the anticipated
administrative costs and loss from disposing of the seven stores' fixed and
intangible assets and is recorded as a credit to restructuring expense, where
the charge was recorded in September 2000. The remaining $0.3 million was
originally charged to cost of goods sold to write these stores' inventory down
to liquidation value, and was credited to cost of goods sold in June 2001, as
the Company no longer expects to sell this inventory at liquidation prices.
The Company's primary activity is the making of small, non-recourse loans
secured by tangible personal property. The income earned on this activity is
pawn service charge revenue. For the three-month Fiscal 2001 Period, pawn
service charge revenue decreased $0.8 million from the three-month Fiscal 2000
Period to $12.7 million. The decrease primarily results from closed stores ($0.9
million) offset by same store increases in pawn service charge revenues ($0.1
million). For the nine-month Fiscal 2001 Period, pawn service charge revenue
decreased $2.7 million from the nine-month Fiscal 2000 Period to $40.4 million
due to closed stores.
Same store pawn service charge revenues vary due to changes in average loan
balances and changes in the average yield on these balances. Average yields vary
due to changes in expected loan forfeitures and mix shifts in the loan portfolio
between loans with different yields. For the three-month period, same store loan
balances increased 11 percent, while average yields declined 13 percentage
points to 116 percent. For the nine-month period, same store loan balances
increased 3 percent, while average yields declined 6 percentage points to 121
percent. The decrease in average yields is primarily due to the higher level of
expected pawn loan forfeitures.
A secondary, but related activity of the Company is the sale of merchandise,
primarily collateral forfeited from its lending activity. For the three-month
Fiscal 2001 Period, sales increased $1.2 million from the three-month Fiscal
2000 Period to approximately $29.6 million. This increase was the result of
higher levels of jewelry scrapping ($2.8 million and higher same store sales
($1.0 million) offset by closed stores ($2.6 million). Annualized inventory
turnover for the three-month Fiscal 2001 Period was 2.2 times compared to 1.6
times for the same period last year.
For the nine-month Fiscal 2001 Period, sales decreased $8.4 million from the
nine-month Fiscal 2000 Period to approximately $97.6 million. This decrease was
the result of closed stores ($8.9 million) and lower same store sales ($4.0
million) offset by higher levels of jewelry scrapping ($4.5 million). Annualized
inventory turnover was 2.1 times compared to 1.9 times for the same period last
year.
For the three-month Fiscal 2001 Period, gross profits as a percentage of sales
decreased 5.7 percentage points from the three-month Fiscal 2000 Period to 37.8
percent. Higher jewelry scrapping (9.6 percentage points) and inventory
shrinkage (0.2 of a percentage point) reduced this margin, offset by improved
margins on merchandise sales (4.1
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percentage points, including 1.1 percentage point from the $0.3 million credit
to cost of goods sold discussed above).
For the nine-month Fiscal 2001 Period, gross profits as a percentage of sales
improved 0.5 percentage points from the nine-month Fiscal 2000 Period to 40.6
percent. Improved margins on merchandise sales (5.4 percentage points), higher
levels of jewelry scrapping (5.0 percentage points) and higher inventory
shrinkage (0.1 of a percentage point) account for the margin improvement.
In the three-month Fiscal 2001 Period, operating expenses as a percentage of
total revenues decreased 6.3 percentage points from the three-month Fiscal 2000
Period to 42.6 percent. This decrease results from greater operating
efficiencies at stores open both periods (3.8 percentage points) as well as the
benefit from store closures (2.5 percentage points). Administrative expenses
decreased 4.4 percentage points to 7.0 percent, primarily due to lower
professional fees and services and compensation expense.
In the nine-month Fiscal 2001 Period, operating expenses as a percentage of
total revenues decreased 2.7 percentage points from the nine-month Fiscal 2000
Period to 40.3 percent. This decrease results from greater operating
efficiencies at stores open both periods (0.6 percentage points) as well as the
benefit from store closures (2.1 percentage points). Administrative expenses
decreased 2.0 percentage points to 7.6 percent, primarily due to lower
professional fees and services and compensation expense.
In the three-month Fiscal 2001 Period, depreciation and amortization as a
percent of total revenues increased 0.8 of a percentage point from the Fiscal
2000 Period to 6.7 percent. This resulted from depreciation and amortization of
assets placed in service in the last twelve months. Interest expense as a
percent of total revenue increased 1.9 percentage points from the Fiscal 2000
Period to 4.7 percent. The interest expense increase was due to higher interest
rates and average debt balances.
In the nine-month Fiscal 2001 Period, depreciation and amortization as a percent
of total revenue increased 0.7 of a percentage point from the Fiscal 2000 Period
to 5.8 percent. This resulted from depreciation and amortization of assets
placed in service in the last twelve months and the lower level of total
revenue. Interest expense as a percent of total revenue increased 2.2 percentage
points from the Fiscal 2000 Period to 4.7 percent. The interest expense increase
was due to higher interest rates and average debt balances.
Operating income increased $3.0 million over the three-month Fiscal 2000 Period
due to lower total operating expenses ($3.8 million) and the credit to
restructuring expense ($0.7 million), partially offset by lower net revenues
($1.5 million), mainly a result of store closures. After higher interest
expenses in the Fiscal 2001 Period, net loss improved $1.7 million over the
Fiscal 2000 Period.
Operating income increased $7.1 million over the nine-month Fiscal 2000 Period
due to lower total operating expenses ($11.6 million) and the credit to
restructuring expense ($0.7 million), partially offset by lower net revenues
($5.2 million), mainly a result of store closures. After higher interest
expenses in the Fiscal 2001 Period, income before the cumulative effect of an
accounting change improved $2.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine-month Fiscal 2001 Period
was $9.5 million compared to $9.8 million provided in the Fiscal 2000 Period, a
decrease of $0.3 million. Improved operating performance in the Fiscal 2001
Period increased income before the cumulative effect of a change in accounting
principle by $2.8 million, and the Company received a $3.0 million larger income
tax refund in Fiscal 2001 than in the prior year. These increases in operating
cash flow were more than offset by a $1.6 million smaller year over year
decrease in inventory, $1.6 million spent on restructuring related payments in
the current period, and changes in other working capital components. Net cash
provided by investing activities was $3.4 million for the Fiscal 2001 Period
compared to a use of cash of $4.2 million in the Fiscal 2000 Period. The change
is due mostly to lower levels of capital expenditures and higher proceeds from
sale-leasebacks of owned properties, offset by smaller decreases in pawn loan
balances than seen in the prior year.
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The Company's credit agreement requires, among other provisions, that the
Company meet certain financial covenants. Specifically, the Company must operate
within specified levels of consolidated net worth, leverage ratio, capital
expenditures, inventory turnover, fixed charge coverage ratio, and EBITDA
(earnings before interest, taxes, depreciation and amortization). The Company
has complied with these covenants throughout Fiscal 2001. Based upon
management's fiscal 2001 operating plan, including the sale-leaseback of certain
assets and the availability under the revolving credit facility, the Company
believes that there is adequate liquidity to fund the Company's working capital
requirements, planned capital expenditures, and make the required principal
payments under the credit agreement. However, material shortfalls or variances
from anticipated performance or delays in the sale of certain of its assets
could require the Company to seek a further amendment to its credit agreement or
alternate sources of financing, or to limit capital expenditures to an amount
less than currently anticipated or permitted under the credit agreement.
The outstanding balance under the credit agreement bears interest at the agent
bank's prime rate plus 250 to 350 basis points, payable monthly. In addition,
the Company pays a commitment fee of 25 basis points of the unused amount of the
total commitment. At June 30, 2001, the Company had $67.7 million outstanding
under the credit agreement.
ACCOUNTING CHANGE
During the second quarter of fiscal 2000, the Company changed its method of
revenue recognition on pawn loans by reducing the accrual of pawn service charge
revenues to the estimated amount that will be realized through loan collection,
and recording forfeited collateral at the lower of the principal balance of the
loan or estimated market value. Previously, pawn service charges were accrued on
all loans, and the carrying value of the forfeited collateral was the lower of
cost (principal amount of loan plus accrued pawn service charges) or market.
The Company believes the new method of revenue recognition is preferable in that
it better aligns reported net revenues and earnings with current economic trends
in its business and the management of the Company. In addition, the Company
believes the new method improves comparability of its operating results and
financial position with similar companies.
The effect of the accounting change on the three months ended June 30, 2000 was
to increase net loss by $0.6 million ($0.05 per share). The effect of the change
on the nine months ended June 30, 2000, excluding the cumulative effect of $14.3
million, was to decrease the net loss by $3.5 million ($0.29 per share).
SEASONALITY
Historically, pawn service charge revenues are highest in the fourth fiscal
quarter (July, August and September) due to higher loan demand during the summer
months and merchandise sales are highest in the first and second fiscal quarters
(October through March) due to the holiday season and tax refunds.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates and foreign currency exchange rates.
The Company does not use derivative financial instruments.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its variable-rate debt instruments. The majority of
the Company's long-term debt at June 30, 2001 is comprised of variable-rate debt
instruments. If interest rates average 25 basis points more during the remainder
of fiscal 2001, the Company's interest expense for the year would increase by
$42,000. This amount is determined by considering the impact of the hypothetical
interest rate increase on the Company's variable rate long-term debt at June 30,
2001.
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The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to the equity investment in Albemarle & Bond Holdings,
plc ("A&B"). A&B's functional currency is the U.K. pound. The U.K. pound
exchange rate can directly and indirectly impact the Company's results of
operations and financial position in several ways, including potential economic
recession in the U.K. resulting from a devalued pound. The impact on the
Company's financial position and results of operations of a hypothetical change
in the exchange rate between the U.S. dollar and the U.K. pound cannot be
reasonably estimated. The translation adjustment representing the weakening in
the U.K. pound during the quarter ended March 31, 2001 (included in the
Company's June 30, 2001 results on a three-month lag as described above) was
approximately $0.2 million. On March 31, 2001, the U.K. pound closed at 0.7061
to 1.00 U.S. dollar, an increase from 0.6699 at December 31, 2000. At June 30,
2001, the U.K. pound closed at 0.7066 to 1.00 U.S. dollar. No assurance can be
given as to the future valuation of the U.K. pound and how further movements in
the pound could effect future earnings or the financial position of the Company.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statement of historical information provided herein are
forward-looking and may contain information about financial results, economic
conditions, trends and known uncertainties. The Company cautions the reader that
actual results could differ materially from those expected by the Company
depending on the outcome of certain factors, including without limitation (i)
fluctuations in the Company's inventory and loan balances, inventory turnover,
average yield on loan portfolios, redemption rates, labor and employment
matters, competition, operating risk, charges related to store closings,
acquisition and expansion risk, liquidity, capital requirements, and the effect
of government and environmental regulations and (ii) adverse changes in the
market for the Company's services. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligations to release publicly the results of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereon, including without limitation,
changes in the Company's business strategy or planned capital expenditures, or
to reflect the occurrence of unanticipated events.
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PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising from its normal business operations. Currently, the Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts. While the ultimate outcome of these lawsuits cannot be
ascertained, after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect on the
Company's financial condition or results of operations. However, there can be no
assurance as to the ultimate outcome of these matters.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<Table>
<Caption>
(a) Exhibit Incorporated by
Number Description Reference to
------ ----------- ------------
10.82 Waivers of Selected Sections of Credit N/A
Agreement between the Company and Wells
Fargo Bank, N.A., as Agent and Issuing Bank,
re: $85 million Credit Facility
10.83 First Amendment to Amended and Restated N/A
Credit Agreement between the Company and
Wells Fargo Bank, N.A., as Agent and Issuing
Bank, re: $85 million Credit Facility
</Table>
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarter ended
June 30, 2001.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZCORP, INC.
(Registrant)
Date: August 14, 2001 By: /s/ DAN N. TONISSEN
-----------------------
(Signature)
Daniel N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
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INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit Incorporated by
Number Description Reference to
------ ----------- ------------
10.82 Waivers of Selected Sections of Credit N/A
Agreement between the Company and Wells
Fargo Bank, N.A., as Agent and Issuing Bank,
re: $85 million Credit Facility
10.83 First Amendment to Amended and Restated N/A
Credit Agreement between the Company and
Wells Fargo Bank, N.A., as Agent and Issuing
Bank, re: $85 million Credit Facility
</Table>